HSBC’s China Manufacturing Purchasing Managers Index (PMI) rose to a record high in January, ringing the bell at , up from in December. This is not a surprise, and to some, it is yet another harbinger of pending inflation. They may be right. Loan growth was statospheric until recently, and moves by the central bank to tighten lending – combined with other statements about the need to prevent asset bubbles – have produced strong stock market reactions. Adding to concerns are suspicions that Chinese banks, anticipating tighter credit policies, front-loaded their loans in January, pouring US$ billion into the system, which could weaken the effectiveness of new policies and mandate the usage of blunter instruments. In December the consumer price index (CPI) rose % year-on-year and the producer price index (PPI) increased by %. Manufacturers polled for the January PMI said that prices for manufacturing inputs have increased, putting upward pressure on wholesale prices which we expect to see reflected in January’s PPI figures when they are released. CPI, however, is another question.
Beijing still has many tools available to control inflation, and the situation is not yet dire. For one thing, the alternate index to HSBC, issued by the China Federation of Logistics and Purchasing and the National Bureau of Statistics, was in January, down from in December. Secondly, policymakers know well that they can produce market effects without actually doing anything. Going to Davos and making noise about renminbi revaluation is one feint, as are suggestions that China might actually increase benchmark interest rates before the US does, and may hot money inflows be damned.
At the same time, the fundamentals are complicated. PPI has risen without impacting CPI in the past, and while industrial overcapacity is certainly a problem, it does make it more difficult for producers to pass on input price increases to consumers. Other fundamentals appear to be counter-inflationary. Monetary velocity is slowing, and a lot of cash is still being kept in banks by both households and businesses. And Andy Rothman points out that a lot of December’s CPI growth was driven by growth in food prices, Are there bubbles in equities and real estate? Almost certainly, but the government learned from its last over-intervention in the real estate market in 2007 and is unlikely to try to cure a feverish economy by dunking it in an ice bath. Beijing can attack property prices through a mixture of targeted mortgage requirements and perhaps the introduction of a new property tax, and the stock markets may well already be starting to correct, as recent underperforming IPOs have illustrated.
Certainly significant structural risks remain, but they don’t necessarily imply a nascent inflationary spiral. This is not to say the current inflation figures are entirely benign; food price increases are still inflation, and the kind of inflation that hits poor people the hardest.